Unlock the Editor’s Digest for free with Roula Khalaf, Editor of the FT, selecting her favourite stories in this weekly newsletter. Far-right parties in France and Germany did well in EU parliamentary elections, raising questions about the impact on European markets. While elections typically have a smaller long-term market impact, it will be interesting to watch European sovereign debt markets. The jobs report for May showed 272,000 jobs added, challenging the interpretation of a worrisome slowdown. Wages also grew in line with the average growth rate, indicating a consistent trend in the labour market. Despite an increase in the unemployment rate, there are reasons to see normalisation in the job market, such as declining wage growth in services industries.
Margins, maths, and valuations were a hot topic last week, with high margin businesses receiving high valuations due to sound analytical reasons. Companies with high intellectual property content tend to have high gross margins and high returns, justifying a higher price/earnings (P/E) valuation. Margins are not always a reliable proxy for returns on investment, as seen in companies like drug distributors and possibly Amazon. Low margin businesses tend to be operationally complex and focused on managing details, limiting their ability to innovate for long-term growth. In contrast, high margin businesses act as ideas factories that drive innovation and business growth with short cycles between inception and implementation.
Many readers shared Maarten Smit of APG’s perspective on the link between profitability and valuations, pointing out research papers on the topic. The equation for P/E ratios shows that firms with higher profitability have a higher warranted P/E multiple, especially when profitability exceeds the discount rate. This finance-101 concept highlights how margins can impact returns on investment and valuations. Peter Osborn of Flexiion added a unique viewpoint on low margin businesses, emphasizing the challenges of operational complexity and lack of innovation compared to high margin businesses. Overall, the connection between margins, maths, and valuations sheds light on the factors influencing market perceptions of different types of businesses.
In conclusion, the Editor’s Digest offers insights into current events and market trends, providing valuable information for readers interested in understanding the dynamics of the economy. The impact of far-right parties in European elections, the implications of the May jobs report, and the relationship between margins, maths, and valuations are all important topics discussed in the newsletter. As the global economy continues to evolve, staying informed about these key issues can help individuals make better decisions in their personal and professional lives. Unlocking the Editor’s Digest for free allows access to expert analysis and commentary from the Editor of the FT, contributing to a more informed and empowered reader base.
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